Question

Consider a monopolistically competitive firm which sells 300 units of output per month. At that output level, MR = MC, average variable costs = $1 and total fixed costs = $900. The firm charges $8 for each unit of output. This firm is making a profit or loss equal to $__________________.

Answer 1

Profit or loss is the difference of total revenue and total cost. It happens at the equilibrium level of 300 units.

Total cost = Total fixed cost + Total variable cost

                        = $900 + ($1 × 300)

                        = 900 + 300

                        = $1,200

Total revenue = Price × Quantity

                        = $8 × 300

                        = $2,400

Since total revenue is higher than total cost, there is profit.

Profit = Total revenue – Total cost

            = 2,400 – 1,200

            = $1,200 (Answer)